FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to ______________________
(Amended by Exch Act Rel No. 312905. eff 4/26/93.)
Commission file Number 0-14506
Pioneer American Holding Company Corp.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2319931
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 North Main Street, Carbondale, PA 18407
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570) 282-2662
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares outstanding as of June 30, 1999 2,921,138 shares
-----------------
<PAGE>
INDEX
PIONEER AMERICAN HOLDING COMPANY, CORP.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--June 30, 1999
and December 31, 1998.----------------------------Page 2-3
Consolidated Statements of Operations--Three and Six
months ended June 30, 1999 and 1998--------------Page 4
Consolidated Statements of Cash Flows--Six months
ended June 30, 1999 and 1998.---------------------Pages 5-6
Notes to Consolidated Financial Statements--
June 30, 1999.------------------------------------Pages 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.--------------------------Pages 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings-----------------------------------Page 15
Item 2. Changes in Securities-------------------------------Page 15
Item 3. Defaults upon Senior Securities---------------------Page 15
Item 4. Submission of Matters to a Vote of Security
Holders---------------------------------------------Page 15
Item 5. Other Information-----------------------------------Page 15
Item 6. Exhibits and Reports on form 8-K--------------------Page 15
SIGNATURES---------------------------------------------------Page 16
Page 1
<PAGE>
<TABLE>
<CAPTION>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
June 30, December 31,
Assets 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 14,989 13,977
Federal funds sold 2,250 7,600
Securities available for sale (cost of securities of
$119,684 on June 30, 1999
and $100,057 on December 31, 1998)
Federal agency mortgage backed obligations 49,914 34,127
Other obligations of Federal agencies 45,804 47,537
Obligations of states and political subdivisions 14,698 13,289
Other securities 6,139 6,126
- ----------------------------------------------------------------------------------------------------------------
Total securities available for sale 116,555 101,079
- ----------------------------------------------------------------------------------------------------------------
Securities held to maturity (approximate market value of
$38,561 on June 30, 1999 and $46,729 on December 31, 1998)
Federal agency mortgage backed obligations 30,453 35,838
Obligations of states and political subdivisions 8,509 10,340
- ----------------------------------------------------------------------------------------------------------------
Total securities held to maturity 38,962 46,178
- ----------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and deferred loan fees 241,317 225,735
Allowance for loan losses (2,976) (2,909)
- ----------------------------------------------------------------------------------------------------------------
Net loans 238,341 222,826
- ----------------------------------------------------------------------------------------------------------------
Accrued interest receivable 2,716 2,547
Premises and equipment 6,701 7,067
Other real estate owned 1,146 1,449
Other assets 3,761 1,843
Cost in excess of fair value of net assets acquired
(net of accumulated
amortization of $971 June 30,
1999 and $952 December 31, 1998) 572 591
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 425,993 405,157
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Balance Sheets, Continued (Unaudited)
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
June 30, December 31,
Liabilities and Stockholders' Equity 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deposits:
Demand - noninterest bearing $ 45,901 42,931
NOW and Super NOW 33,172 38,462
Savings 60,378 56,714
Money Market 20,254 22,481
Time 146,917 146,772
- ------------------------------------------------------------------------------------------------------------
Total deposits 306,622 307,360
- ------------------------------------------------------------------------------------------------------------
Accrued interest payable 2,336 2,095
Dividends payable 584 581
Other borrowed money 81,408 58,357
Other liabilities 1,561 1,298
- ------------------------------------------------------------------------------------------------------------
Total liabilities 392,511 369,691
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $1 par value per share, 25,000,000 shares authorized;
2,926,242 shares on June 30, 1999 and 2,904,309 on December 31, 1998
issued 2,926 2,904
Additional paid-in capital 11,859 11,768
Retained earnings 20,874 20,120
Accumulated other comprehensive income (2,065) 674
Less: Treasury stock at cost (5,104 shares)
on June 30, 1999 (112) 0
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 33,482 35,466
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 425,993 405,157
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Statement Operations (Unaudited)
Three Months Ended Six Months Ended
(Dollars in thousands) (Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 4,922 4,790 9,734 9,474
Interest on Federal funds sold 69 82 151 91
Interest on investments:
Taxable 2,101 1,933 4,075 3,982
Non-taxable 310 276 627 558
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 7,402 7,081 14,587 14,105
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 2,627 2,650 5,356 5,281
Interest on Federal funds purchased 0 1 0 23
Interest on other borrowed money 1,142 889 2,110 1,709
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,769 3,540 7,466 7,013
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,633 3,541 7,121 7,092
Provision for loan losses 110 150 185 300
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,523 3,391 6,936 6,792
- ---------------------------------------------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 372 335 748 637
Gain on sale of available for sale securities 88 0 88 296
ATM fees 156 115 297 219
Other income 145 134 271 285
- ---------------------------------------------------------------------------------------------------------------------------------
Total other operating income 761 584 1,404 1,437
- ---------------------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 1,390 1,318 2,721 2,670
Net occupancy expense of bank premises 269 249 554 519
Furniture and equipment expenses 247 193 489 362
Data processing expense 57 61 122 124
Other expenses 902 893 1,852 1,713
- ---------------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 2,865 2,714 5,738 5,388
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,419 1,261 2,602 2,841
Income tax expense 380 340 680 780
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,039 921 1,922 2,061
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income net of tax
Unrealized gain/loss on securities
Unrealized holding gain/(loss) arising during the period (1,819) 16 (2,681) 56
Less reclassification adjustment for gains
included in net income (58) 0 (58) (195)
Comprehensive income (838) 937 (817) 1,922
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share Data (based on net income):
Basic $ 0.36 0.32 0.66 0.71
Diluted 0.35 0.31 0.65 0.70
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
PIONEER AMERICAN HOLDING COMPANY, CORP
Consolidated Statements of Cash Flows (Unaudited) Six Months Ended
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------
June 30, June 30,
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,922 2,061
Adjustments to reconcile net income to net cash from operating activities:
Net gain on sale of securities available for sale (88) (296)
Accretion of discount on securities
and money market investments (99) (21)
Amortization of premium on investment
securities 258 141
Provision for loan losses 185 300
Decrease in deferred loan fees (49) (62)
Decrease (increase) in accrued interest receivable (169) 263
Depreciation and amortization of premises
and equipment 529 419
Loss on sale of premises and equipment 1 0
Loss on sale of other real estate 51 113
Proceeds from the sale of mortgages
and PHEAA loans held for sale 674 2,560
Net increase in mortgage and PHEAA loans
held for sale (1,132) (2,959)
Gain on sale of mortgages and PHEAA loans (5) (20)
Increase in other assets (506) (1,433)
Amortization of goodwill 19 19
Increase in accrued interest payable 241 252
Increase in other liabilities 263 1,107
- --------------------------------------------------------------------------------------------------------
Total adjustments to reconcile net income to net cash
from operating activities 173 383
- --------------------------------------------------------------------------------------------------------
Net cash from operating activities 2,095 2,444
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and calls of securities
held to maturity 7,085 5,575
Proceeds from maturities and calls of
securities available for sale 14,114 10,827
Proceeds from sales of securities available for sale 4,626 12,012
Purchases of securities held to maturity 0 (25,705)
Purchases of securities available for sale (38,307) (6,685)
Net increase in loans made to customers, excluding
provision for loan losses and change in
deferred loan fees (15,337) (9,629)
Acquisition of premises and equipment (164) (473)
Proceeds from sale of other real estate 401 64
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (27,582) (14,014)
- --------------------------------------------------------------------------------------------------------
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
PIONEER AMERICAN HOLDING COMPANY, CORP.
Consolidated Statements of Cash Flows, Continued (Unaudited)
Six Months Ended
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------
June 30, June 30,
1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase(decrease) in demand, NOW and Super NOW,
savings, money market and time deposits. $ (738) (662)
Dividends paid (1,165) (1,095)
Exercise of stock options 113 336
Purchase of treasury stock (112) 0
Federal funds purchased 0 (2,350)
Addition to other borrowed money 25,000 25,000
Repayment of other borrowed money (1,949) (1,828)
- ------------------------------------------------------------------------------------------------------
Net cash from financing activities 21,149 19,401
- ------------------------------------------------------------------------------------------------------
Net increase(decrease) in cash and cash equivalents (4,338) 7,831
Cash and cash equivalents at beginning of period 21,577 14,918
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 17,239 22,749
- ------------------------------------------------------------------------------------------------------
Supplemental Disclosure:
Cash payments for interest 7,225 6,761
Cash payments for income taxes 625 1,065
Transfer of assets from loans
to other real estate 149 327
Net unrealized loss on securities
available for sale, gross 4,151 211
Tax effect on unrealized loss
on securities available for sale 1,412 72
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
Notes to Condensed Consolidated Financial Statements
(1) Summary of Significant Accounting Policies:
Business--Pioneer American Holding Company Corp. (the "Company") and its
wholly owned subsidiary, Pioneer American Bank, National Association ("Pioneer")
provide a wide range of banking services to individual and corporate customers
through its branch banks in Lackawanna, Luzerne, Wayne, Wyoming, Susquehanna and
Monroe counties in Northeastern Pennsylvania. Pioneer is subject to competition
from other financial institutions and other financial services companies.
Pioneer is subject to the regulations of certain federal agencies and undergoes
periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation--The accompanying consolidated
financial statements were prepared in accordance with instructions to Form 10-Q,
and therefore, do not include information or footnotes necessary for a complete
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. However, all normal,
recurring adjustments which, in the opinion of management, are necessary for a
fair presentation of the financial statements, have been included. These
financial statements should be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual Report for the
period ended December 31, 1998. The results for the six months ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. All material intercompany balances and
transactions between the Company and its subsidiary have been eliminated. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Impact of Other Recently Issued Accounting Standards--In June 1998, the
FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement (as amended BY SFAS No. 137 in June, 1999)
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of certain exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposures. SFAS No. 133, as amended, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Earlier adoption is
permitted. The Company has not yet determined the impact, if any, of this
statement, including its provisions for the potential reclassifications of
investment securities, on earnings, financial condition or equity.
(2) Securities Portfolio
Securities available for sale at June 30, 1999 and December 31, 1998 are
summarized as follows: (000's)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
Cost Market Value Cost Market Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agency mortgage based
obligations $ 51,774 49,914 33,907 34,127
Other obligations of Federal agencies 46,990 45,804 47,207 47,537
Obligations of State and Political subdivisions 14,781 14,698 12,817 13,289
Other securities 6,139 6,139 6,126 6,126
---------------------------------------------------------------------
Securities available for sale: $ 119,684 116,555 100,057 101,079
--------------------------------------------------------------------
</TABLE>
The adjustment in stockholders' equity for the unrealized loss of the securities
available for sale at June 30, 1999, net of tax, was $(2,065,000). Included in
net deferred tax assets is $1,064,000 for this same unrealized loss.
Securities held to maturity at June 30, 1999 and December 31, 1998 are
summarized as follows: (000's)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
Cost Market Value Cost Market Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agency mortgage based
obligations $ 30,453 29,820 35,838 35,979
Obligations of State and Political subdivisions 8,509 8,741 10,340 10,750
-----------------------------------------------------------------------
Securities held to maturity: $ 38,962 38,561 46,178 46,729
-----------------------------------------------------------------------
</TABLE>
Page 7
<PAGE>
Notes to Condensed Consolidated Financial Statements
(3) Stockholders' Equity and Per Share Data
The Company currently has one million shares of authorized, but unissued
preferred stock. At June 30, 1999 there were 25,000,000 shares of common stock
at $1 par value authorized with 2,926,242 shares issued and 2,921,138
outstanding.
At June 30, 1999 the Company has issued and outstanding 55,250 options to
purchase shares of the Company, exercisable at between $8.00 to $13.00 per
share. Such options were issued with exercise prices equal to the market value
of the Company's common shares at the time of the grant. In the first quarter
46,668 options were exercised and in the second quarter 275 of the previously
issued options were exercised.
Basic earnings per share is calculated by dividing net income by the
weighted average shares outstanding during the period. The dilutive effect of
stock options is excluded from basic earnings per share, but included in the
computation of diluted earnings per share.
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $ 1,039 921 1,922 2,061
============ ============ =========== ============
Denominator:
Denominator for basic earnings per share -
weighted average shares 2,921 2,901 2,921 2,884
Effect of dilutive securities:
Employee stock options 28 56 27 67
------------ ------------ ----------- ------------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversion 2,949 2,957 2,948 2,951
============ ============ =========== ============
Basic earnings per share $ 0.36 0.32 0.66 0.71
============ ============ =========== ============
Diluted earnings per share $ 0.35 0.31 0.65 0.70
============ ============ =========== ============
</TABLE>
The market value of the common shares of the Company at June 30, 1999 was
$21.00.
Page 8
<PAGE>
Financial Review Management's Discussion and Analysis of Financial
Condition and Results of Operation
Highlights
Total Assets were $425,993,000 at June 30, 1999 and $405,157,000 at December
31, 1998 which is an increase of $20,836,000 or 5.1%. Deposits decreased by
$738,000 from $307,360,000 at December 31, 1998 which is a decrease of .2 % at
June 30, 1999. Total net loans as of December 31, 1998 were $222,826,000, and
increased by $15,515,000 or 7.0% to $238,341,000 at June 30, 1999.
The average earning assets were $398,347,000 during the six months ended
June 30, 1999 and $364,434,000 during the six months ended June 30, 1998. This
is an increase of $33,913,000 or 9.3%. For the second quarter average earning
assets were $404,945,000 for 1999 and $367,109,000 for 1998, an increase of
$37,836,000 or 10.3%.
Average total assets during the six months ended June 30, 1999 were
$422,634,000 and $387,349,000 for the six months ended June 30, 1998 and
$429,356,000 and $390,683,000 for the three months ended June 30, 1999 and 1998,
respectively. The return on average total assets was 1.0% for both six months
and three months ended June 30, 1999. The return on average total assets was
1.0% for both six months and three months ended June 30, 1998. Return on average
equity for six and three months ended June 30, 1999 were 10.9% and 11.8%,
respectively, and for the same periods in 1998 were 12.3% and 11.0%. Average
equity was $35,414,000 for the first six months and $35,089,000 for the second
quarter of 1999 and $33,471,000 for the first six months and $33,565,000 for the
second quarter of 1998.
Net income decreased $139,000 or 6.7% comparing the first six months of 1999
to the first six months of 1998. The decrease in 1999 was driven by an increase
in total other operating expense. This increase was offset by a lesser increase
in net interest income after provisions for loan loss. Net income for the second
quarter of 1999 increased $118,000 or 12.8% compared to the same period in 1998.
During the second quarter of 1999 an $88,000 gain was recognized on sale of
available for sale securities and no gain was recognized during the same period
in 1998. Also, during the second quarter of 1999 there was a slight increase in
other operating expense that was partially offset by an increase in net interest
income.
Net income per diluted share was $0.65 for the first six months of 1999 and
$0.70 for the first six months of 1998. The decrease in earnings per share was a
result of lower net income. Net income per diluted share for three months ended
June 30, 1999 and June 30, 1998 was $0.35 and $0.31, respectively. Earnings per
basic share was $0.66 and $0.71 for the six months ended June 30, 1999 and 1998,
and $0.36 and $0.32 for the three months ended June 30, 1999 and 1998,
respectively.
Available for Sale and Securities Held to Maturity
A major factor in the increase of total assets at June 30, 1999 is the
increase in the Bank's securities portfolio of $8,260,000 or 5.6%. There was an
increase of $15,787,000 or 46.3% over December 31, 1998 in Federal agency
mortgage backed obligation securities available for sale. Offsetting this
increase was a decrease in the Bank's securities held to maturity of $7,216,000
or 15.6%. The increase in the securities portfolio in 1999 over 1998 in
securities available for sale is a result of the investment of funds borrowed
from the Federal Home Loan Bank of Pittsburgh. In the first quarter of 1999 the
bank increased securities available for sale as part of its asset/liability
strategy to enhance net interest income.
Net Loans
Net loans increased by $15,515,000 or 7.0% over December 31, 1998. This was
the second major factor in the increase of total assets. This increase in net
loans was primarily driven by a $6.0 million increase in Home Equity loans as a
result of a special promotion offered by the Bank in the first quarter of 1999.
Money used to finance these loans was funded from a portion of the borrowings
from the Federal Home Loan Bank of Pittsburgh in the first quarter of 1999. All
other loan areas increased for the first six months of 1999 due to general
market conditions.
Other Assets
Other assets increased to $3,761,000 at June 30, 1999 from $1,843,000 at
December 31, 1998. This increase was due to the deferred tax on the Bank's
available for sale securities.
Total Deposits
Total Deposits were $306,662,000 at June 30, 1999 and $307,360,000 at
December 31, 1998 which is a decrease of $738,000 or .2%. During the first six
month of 1999 NOW and Super NOW decreased $5,290,000 or 13.8%. Money market
accounts also decreased by $2,227,000. Offsetting these decreases were increases
in demand-non interest bearing of $2,970,000 and $3,664,000 in savings. Time
deposits continue to remain fairly constant. Federal fund rates, which are a
driving factor in the pricing of liabilities, have continued to remain stable in
1999. These interest rates have led to a trend from long-term instruments to
intermediate and short-term instruments reflecting the consumers' unwillingness
to commit their funds for extended periods of time.
Page 9
<PAGE>
Financial Review Management's Discussion and Analysis of Financial
Condition and Results of Operation, continued
Other Borrowed Money
Total liabilities were $392,511,000 at June 30, 1999 and $369,691,000 at
December 31, 1998 which is an increase of $22,820,000 or 6.2%. The largest
increase in total liabilities was the result of an increase in Other borrowed
money of $23,051,000 over December 31, 1998. Management borrowed $25,000,000 in
February of 1999 from Federal Home Loan Bank of Pittsburgh (which will mature in
February, 2009). The money borrowed was invested in mortgage backed securities
and the Bank's loan portfolio. Bank management believes that it was appropriate
to take advantage of borrowing at a rate lower than the rate received in
investing in Federal agency mortgage backed obligation available for sale
securities.
Net Interest Income
Net interest income for the first six months of 1999 increased $29,000 or
.4% compared with the same period of 1998. While net interest income for the
second quarter of 1999 increased $92,000 or 2.6% over the second quarter of
1998. Total interest income increased $482,000 and $321,000 for six and three
months ended June 30, 1999. The increase in interest income was the result of an
increase in the total average of interest earning assets. Interest earning
assets were up $33,913,000 and $37,836,000 for the six and three months of 1999
compared to the same periods in 1998. The security portfolio provided $162,000
of the increase and the loan portfolio provided $260,000 for the six months
ended June 30, 1999. Total interest expense also increased $453,000 resulting in
a net increase of $29,000 or .4% in net interest income. During the first
quarter of 1999 the Bank borrowed an additional $25,000,000 from Federal Home
Loan Bank of Pittsburgh. The money borrowed was invested in mortgage backed
securities and also used to increase our loan portfolio. Offsetting the increase
of interest income for the six and three months ended June 30, 1999 was interest
expense on other borrowed money which was up $401,000 and $253,000, respectively
for the same period in 1998. Total interest expense on deposits remained fairly
constant for both the quarter and six months ended June 30, 1999 as compared to
the prior year.
In addition to gap management, the Company also uses simulation analysis to
help monitor and manage interest rate risk. In this analysis the Company
examines the result of a 200 basis point change in market interest rates and the
effect on net interest income. It is assumed that the change is instantaneous
and that all rates move in a parallel manner. Assumptions are also made
concerning prepayment speeds on mortgage loans and mortgage securities as well
as growth rates of deposit and loan portfolios. The results of this rate shock
are a useful tool to assist the Company in assessing interest rate risk inherent
in their balance sheet. Below are the results of this ratio shock analysis as of
June 30, 1999 and 1998.
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------------------------------------------------------------------------------------------
Net Interest Percentage Change in Net Interest Percentage Change in
Change in Rates Income Change Net Interest Income Income Change Net Interest Income
<S> <C> <C> <C> <C>
+200 (2) (0.01%) 509 3.80%
Static - - - -
-200 (1,056) (7.22%) (1,334) (10.00%)
</TABLE>
A 200 basis point rise in interest rates results in a .01% decrease in interest
income. A 200 basis point decrease in interest rates results in a decrease in
interest income primarily due to optionality in the Company's securities
portfolio. In a falling rate environment it is assumed that certain of the
Company's securities would be called and the resulting cash flows would be
reinvested at the lower prevailing rates.
Provision / Reserve for Loan Losses and Nonperforming Loans
<TABLE>
<CAPTION>
Quarter Ended Year Ended Quarter Ended
June 30, December 31, June 30,
1999 1998 1998
---------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 2,909,000 2,759,000 2,759,000
Recoveries 22,000 38,000 33,000
Less: Charge Offs 140,000 308,000 162,000
Provision for Loan Losses 185,000 420,000 300,000
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 2,976,000 2,909,000 2,930,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses for the first six months of 1999 amounted to
$185,000 and $110,000 for the three months ended June 30, 1999. It was $300,000
for the six months ended 1998, and $150,000 for the three months ended 1998. Net
charge offs for the first six months of 1999 totaled $118,000 while net charge
offs for the comparable period in 1998 were $129,000. The ratio of net charge
offs to average loans outstanding was .05% for both the first six months of 1999
and 1998.
Page 10
<PAGE>
Financial Review Management's Discussion and Analysis of Financial
Condition and Results of Operation, continued
Provision / Allowance for Loan Losses and Nonperforming Loans, continued
The allowance for loan losses at June 30, 1999 totaled $2,976,000,
increasing $67,000 or 2.3% from $2,909,000 at December 31, 1998. The Company's
ratio of allowance for loan losses to total loans outstanding was 1.23% at June
30, 1999, and the same ratio as of December 31, 1998 was 1.29%. The decline in
this ratio reflects the growth in the Bank's loan portfolio and a decrease in
non-performing loans.
<TABLE>
<CAPTION>
Non-performing loans are listed as follows:
6/30/99 12/31/98
------------- -------------
<S> <C> <C>
Non Accrual $ 1,522,000 $ 1,684,000
90 Days and More Past Due 941,000 838,000
Restructured 1,040,000 1,247,000
------------- -------------
$ 3,503,000 $ 3,769,000
</TABLE>
The Company generally places a loan on a non-accrual status when, in the
opinion of management the borrower does not have the ability to meet the
original terms of the loan. The Company reserves the accrued interest on all
commercial loans over ninety days past due and these loans are included in the
non-accrual totals. Mortgages past due 90 days or more are placed in non-accrual
status unless the Bank considers the loan to be well secured and in the process
of collection. Consumer loans that are not secured by real estate are generally
charged off after 120 days past due.
There are no impaired loans under SFAS No. 114 which are not included in
the above table.
The loan loss reserve as of June 30, 1999 has been deemed adequate by
management. This amount is sufficient to cover inherent losses in the loan
portfolio given the present past due, nonperforming and classified levels.
Determination of loan loss reserve adequacy follows the guidelines in the
Comptroller's Banking Circular No.201(revised), including risk loss analysis,
specific allocations for problematic credits and provision for class loans, and
the requirements of SFAS No. 114, as amended.
Other Operating Income
Other operating income for the first six months of 1998 was $1,437,000,
decreasing 2.3% to $1,404,000 reported for the first six months of 1999. There
was a gain recognized for the sale of securities available for sale in 1999 for
the first six months of $88,000 compared to $296,000 for the same period of
1998. Other operating income for the three months ended June 30, 1999 increased
$177,000 or 30.3%. The Company did recognize a gain on the sale of securities
available for sale of $88,000 during the second quarter of 1999. There were no
gains in 1998 for the same period.
ATM fees increased $78,000 and $41,000 for the six and three months ended
June 30, 1999. This increase was attributable to a volume increase.
Service charge income on deposit accounts increased for both three and six
months ended June 30, 1999 compared to the same periods in 1998. This increase
was due to an increase in the fees collected for returned items and an increased
number of accounts subject to service charge routines of the Bank. During the
first quarter of 1999 pricing of service charges and maintenance fees were
increased based upon an earnings improvement study completed by management of
the Bank.
Other Operating Expenses
Total other operating expenses were $5,738,000 in the first six months of
1999 while other operating expenses were $5,388,000 in the first six months of
1998 reflecting an increase of $350,000 or 6.5%. For the second quarter of 1999
total other operating expense was up $151,000 or 5.6% over the same period in
1998. The 1999 increase in salaries for the six and three months ended June 30,
1999 was attributable to normal salary increase and an increase in full-time
equivalents. Furniture and Equipment expense for both six and three months ended
June 30, 1999 was up 35.1% and 28.0%. The increase for these periods was
primarily due to an increase in maintenance contracts on our expanded ATM
network. During the second quarter of 1998 we replaced computer hardware and
software to update for Year 2000 compliance. The Bank purchased a tract of land
on 455 Market Street, Kingston, Pennsylvania for the purpose of constructing a
full service office. This office was completed in November of 1998 and replaced
the existing Kingston leased office. These changes to the Bank resulted in
increased depreciation.
Other expenses for the second quarter of 1999 remained fairly constant
compared to the second quarter in 1998. Other expenses increased by $139,000 for
the six months ended June 30, 1999 or 8.1% compared with the same period of
1998. A significant portion of
Page 11
<PAGE>
Financial Review Management's Discussion and Analysis of Financial
Condition and Results of Operation, continued
Other Operating Expenses, continued
the increase was in marketing expense which was up $33,000. In April of 1998 the
Bank contracted with an advertising company for one year to develop a new
marketing campaign. This also includes marketing the relocation of an existing
branch during the fourth quarter of 1998.
Other expenses also increased for the six months ended June 30, 1999 as a
result of the following which occurred during the first quarter: Effective
October 12, 1998, Donald A. Hoyle, Jr., the former President and Chief Executive
Officer of the Company, retired from his positions with the Company and the
Bank. In connection with such retirement, the Company and Mr. Hoyle entered into
a Retirement Agreement and Mutual release, dated March 16, 1999 (collectively,
the "Agreements"). Mr. Hoyle also resigned his position as a director of the
Company as of such date. The Agreements provide for severance benefits to be
paid to Mr. Hoyle in the form of a lump sum payment of $216,190 (less applicable
federal, state and local withholding taxes). Such payment includes among other
things, payment for all accrued but unused vacation pay. The Company also agreed
to continue any fringe benefits payable to Mr. Hoyle after October 12, 1998,
only to the extent that such continuance is required by law. The Retirement
Agreement also provides that after October 12, 1998, no further premiums shall
be paid by the Bank on a life insurance policy on the life of Mr. Hoyle issued
by Principal Mutual Life Insurance Company. Mr. Hoyle also acknowledged that he
owed the Bank $289,560 pursuant to his obligation to reimburse the Bank for
premiums advanced by the Bank pursuant to such policy. Mr. Hoyle agreed to repay
the Bank the sum of $252,875 for life insurance premiums paid by the Bank
pursuant to this policy and the bank agreed to forgo the balance of the life
insurance premiums paid. In exchange for this payment, Mr. Hoyle agreed that he
will receive no other wages, bonuses, severance or other similar payments or
benefits from the Company except as provided in the Retirement Agreement. In
consideration for this retirement benefit, Mr. Hoyle agreed to release the
Company and its affiliates from any and all claims that he has against the
Company. $175,000 of the expense incurred as a result of this Agreement were
accrued for in 1998, the remaining amount was expensed in the first quarter of
1999, for an additional first quarter expense of approximately $78,000.
Net occupancy expense of bank premises and data processing expense for both
three and six months ended June 30, 1999 remained fairly constant with a slight
increase or decrease in each of the categories as compared to the same period of
1998.
Income Taxes
The provision for income taxes for the first six months of 1999 was $680,000
and $780,000 for the first six months of 1998. The effective rate for the first
six months of 1999 was 26.1% and 27.5% for the same period of 1998. The
effective rate for the second quarter was 26.8% for 1999 and 26.9% for 1998. The
fluctuation in the Company's tax expense and effective tax rate is primarily due
to management's strategy in investing in tax free securities and to the level of
pre-tax income.
Capital Management and Liquidity and Rate Sensitivity
The objectives of the Corporation's capital management policy place an
emphasis on both current financial positioning and future capital needs based on
anticipated growth. These objectives are maintained by management which monitors
its liquidity requirements through its asset/liability management program. This
program, with other management analysis, enables the bank to meet its cash flow
requirements and adapt to the changing needs of the Corporation's customers and
the requirements of regulatory agencies. As of June 30, 1999, the most recent
notification from the Office of the Comptroller of the Currency categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios of greater than
or equal to 10%, 6%, and 5%, respectively.
The Corporation's principal source of liquidity has been short-term U.S.
Government and U.S. Agency obligations, and various corporate notes. Money
market investments and portfolio investments are kept liquid in order to
effectively match our current deposit structure. The Corporation is affected by
changes in the level of rates of interest. Earnings will be sensitive to
interest rate changes to the degree that the average yield on assets responds
differently to a change in interest rates than does average cost of funds.
Adequate liquidity affords the Corporation flexibility in meeting consumer loan
demand and deposit fluctuations.
The Corporation actively manages the interest rate sensitivity
characteristics of its assets and liabilities to control the effects of changes
in the general level of interest rates upon net interest revenue. This is
accomplished by the asset/liability committee which consists of senior
management and the board of directors, who are responsible for management
decisions as to the asset/liability maturity mix.
Effects of Inflation
Economic conditions are reviewed by management in a continuing effort to
adjust to the changing economic environment. The effects of these changes on the
banking industry as a whole in the Company's market area are reviewed by
management in order to compete at a level consistent with the goals of
profitability and sound management policy.
Page 12
<PAGE>
Financial Review Management's Discussion and Analysis of Financial
Condition and Results of Operation,
continued
Effects of Inflation, continued
Increases in the rate of inflation can increase longer term interest rates,
which can reduce the value of securities held to maturity, mortgage loans and
other fixed rate and term assets. Inflationary periods also may tend to increase
the borrowing needs of consumers, leading to requests for additional funds,
which can expand total loans above expected levels and therefore require
increased efforts to ensure the maintenance of adequate capital.
The banking industry is affected by inflation in a different manner than
other industries, although certain changes have similar effects on both banks
and other business enterprises. Current economic indicators are moving in the
direction of possible inflationary changes. Interest rates have been fluctuating
in response to economic changes, which will affect the asset/liability policy of
the bank. Rates on deposits and loans are changed as necessary with
consideration of economic and market conditions. Our continuing efforts to
monitor all phases of the financial condition of all assets which can be
affected by inflation include the pricing of collateral on a regular basis.
Year 2000
Year 2000 Compliance
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use a date after
December 31, 1999. The erroneous date can be interpreted in a number of
different ways, the most common being Year 2000 represented as the year 1900.
Correctly identifying and processing Year 2000 as a leap year may also be an
issue. These misinterpretations of various dates in the Year 2000 could result
in a system failure or miscalculations causing disruptions of normal business
operations including, among other things, a temporary inability to process
transactions, track important customer account information, or provide
convenient access to this information.
Company State of Readiness
The Company has completed an assessment and testing of its financial and
operational software systems in accordance with the various regulatory agency
guidance documents. The Company is maintaining an inventory of hardware and
software systems, which ranges from mission critical software systems and
personal computers to security and video equipment, and general office
equipment. The Company has prioritized its hardware and software systems which
focus on the most critical systems first. In connection with the Company's
assessment, a number of the less significant third party vendors advised the
Company that their software is Year 2000 compliant, and the Company has fully
tested that software.
The Company has completed an assessment of its core financial and
operational software systems and has taken the necessary steps to bring them
into compliance. Our Year 2000 project plan is in place and the testing of our
core applications for critical dates has been completed. The Company performed
significant Year 2000 testing prior to December 31, 1998 and through June 30,
1999. All core applications tested were Year 2000 compliant and it is therefore
anticipated that all core applications are fully compliant.
Contingency Plan
The Board of Directors and Management of the Company recognize that, despite
efforts to renovate or replace mission-critical systems, the risk of disruption
remains due to the failure of a resource which supports critical business
activities. To provide for business continuity in the event of such disruptions,
the Board has directed management to coordinate the development of contingency
plans for each line of business designated as a core business process.
Management will reevaluate identification of mission-critical resources and
develop and document Y2K scenarios which could result in the loss of one or more
resources. Because of the number of critical resources and different
combinations of failure scenarios, it is impossible to prepare for every
conceivable event. Management will assign a probability and prioritize and
allocate contingency planning resources based on the level of probability. The
bulk of evaluation of contingency needs will be completed by June, 1999, when
the Company will shift to a monitoring mode, which will include an early warning
system to identify suppliers who may be experiencing date related failures.
Cost of Year 2000
Over the past several years, the Company's Technology Plan has called for an
aggressive schedule for installing new systems or upgrading old systems in order
to build a technology infrastructure which will allow the Company to offer
competitive products while providing for internal efficiencies and customer
service improvement. The Technology Plan has resulted in positioning the Company
to continue its technology improvements while avoiding specific costly Year 2000
issues. Based on preliminary information, costs of addressing potential problems
are estimated to be $400,000. The Bank had expenditures of $260,000 in 1998 for
Y2K related matters, of which $10,000 was expensed in 1998 and $250,000 was
capitalized and will be amortized over the next five years. Additionally, during
1999 the bank anticipates further expenditures of $140,000, all of which will be
capitalized and amortized over the next five years, with $20,000 expensed in
1999. This cost is primarily associated with purchasing new equipment and
software.
Page 13
<PAGE>
Financial Review Management's Discussion and Analysis of Financial
Condition and Results of Operation, continued
Year 2000, continued
Risks of Year 2000
Systems outside of the direct control of the Company, such as ATM networks,
credit card processors, and the Fed Wire System, pose a more problematic issue.
A theoretical problem scenario would involve a temporary inability of customers
to access their funds through automated teller machines, point of service
terminals at retailer locations, or other shared networks. For this reason
alone, banks and their governing agencies are closely scrutinizing the progress
of our major industry service providers.
Successful and timely completion of the Year 2000 project is based on
management's best estimates, which were derived from numerous assumptions of
future events, which are inherently uncertain, including the availability of
certain resources, third party modification plans and other factors.
Forward Looking Statements
Within these financial statements we have included certain "forward
looking statements" concerning the future operations of the Corporation. It is
management's desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. This statement is for the
express purpose of availing the Corporation of the protections of such safe
harbor with respect to all "forward looking statements" contained in our
financial statements. We have used "forward looking statements" to describe the
future plans and strategies including our expectations of the Corporation's
future financial results and Year 2000 issues. Management's ability to predict
results or the effect of future plans and strategy is inherently uncertain.
Factors that could affect results include interest rate trends, competition, the
general economic climate in Pennsylvania, and the country as a whole, loan
delinquency rates, and changes in federal and state regulation. These factors
should be considered in evaluating the "forward looking statements", and undue
reliance should not be placed on such statements.
Page 14
<PAGE>
Part II.
Item 1. Legal Proceedings
The nature of the business of Pioneer American Holding Company Corp. and its
subsidiary, Pioneer American Bank, N.A., generates a certain amount of
litigation involving matters arising in the ordinary course of business.
However, in the opinion of management, there are no proceedings pending to which
Pioneer American or its subsidiary are parties or to which their property is
subject, which, if determined adversely, would be material in relation to
Pioneer American's results of operation, stockholder's equity, or financial
condition. In addition, no material proceedings are pending or are known to be
threatened or contemplated against Pioneer American or its subsidiary by
governmental authorities or other parties.
Item 2. Changes in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of Pioneer American Holding Corp was
held on June 8, 1999.
(b) Three directors were elected at this meeting for four
year terms as follows:
Gene E. Goldenziel
William K. Nasser
John W. Walski
Item 5. Other Information
On June 8, 1999 William K. Nasser resigned from the Company's Board and was
named director emeritus. Joseph Nasser, his son, was appointed to the Board to
fill the vacancy and was also elected to the bank subsidiary Board.
Information concerning beneficial ownership of the individual named above
follows:
Name Shares of common stock Percent of
Beneficially Owned Class
Joseph Nasser 23,587* .80
*Includes 6,343 shares owned jointly with spouse and 14,688 shares
held in trust for daughters
Item 6. Exhibits and Reports on Form 8-K
None
Page 15
<PAGE>
SIGNATURES *
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIONEER AMERICAN HOLDING COMPANY, CORP.
Date: August 7, 1999 By /s/ John W. Reuther
John W. Reuther
President & C.E.O.
Date: August 7, 1999 By /s/ Patricia Cobb Esq.
Patricia Cobb Esq.
Executive Senior Vice President/
In-House Counsel
Page 16
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000760731
<NAME> PIONEER AMERICAN HOLDING CO.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 14,989
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 116,555
<INVESTMENTS-CARRYING> 38,962
<INVESTMENTS-MARKET> 38,561
<LOANS> 241,317
<ALLOWANCE> 2,976
<TOTAL-ASSETS> 425,993
<DEPOSITS> 306,622
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,481
<LONG-TERM> 81,408
0
0
<COMMON> 2,926
<OTHER-SE> 30,556
<TOTAL-LIABILITIES-AND-EQUITY> 425,993
<INTEREST-LOAN> 9,734
<INTEREST-INVEST> 4,702
<INTEREST-OTHER> 151
<INTEREST-TOTAL> 14,587
<INTEREST-DEPOSIT> 5,356
<INTEREST-EXPENSE> 7,466
<INTEREST-INCOME-NET> 7,121
<LOAN-LOSSES> 185
<SECURITIES-GAINS> 88
<EXPENSE-OTHER> 5,738
<INCOME-PRETAX> 2,602
<INCOME-PRE-EXTRAORDINARY> 1,922
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,922
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 3.44
<LOANS-NON> 1,522
<LOANS-PAST> 941
<LOANS-TROUBLED> 1,040
<LOANS-PROBLEM> 537
<ALLOWANCE-OPEN> 2,909
<CHARGE-OFFS> 140
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 2,976
<ALLOWANCE-DOMESTIC> 2,161
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 815
</TABLE>
